PFSWEB, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (continued)

after giving affect thereto, Supplies Distributors’ net worth would be less than $1.0 million. At December 31, 2007, Supplies Distributors’ net worth was $10.6 million. Supplies Distributors has received lender approval to pay $2.8 million of dividends in 2008 but, under the terms of its amended credit agreements, is restricted from paying further annual cash dividends without the prior approval of its lenders (see Notes 3 and 4). Supplies Distributors has paid dividends to PFSweb of $2.4 million, $3.9 million and $1.0 million in the years ended December 31, 2007, 2006 and 2005, respectively.

8. Income Taxes

     A reconciliation of the difference between the expected income tax expense at the U.S. federal statutory corporate tax rate of 34%, and the Company’s effective tax rate is as follows (in thousands):

		Year Ended				Year Ended				Year Ended
		December 31,				December 31,				December 31,
		2007				2006				2005
Income tax provision (benefit) computed at statutory rate		$	(199	)		$	(4,548	)		$	86
Impact of foreign taxation			(3	)			(17	)			(16	)
Foreign dividends received			494				850				—
Items not deductible for tax purposes			230				1,704				337
Change in valuation reserve			898				3,285				706
Other			(621	)			(120	)			(112	)
Provision for income taxes		$	799			$	1,154			$	1,001

     The consolidated income (loss) before income taxes, by domestic and foreign entities, is as follows (in thousands):

		Year Ended				Year Ended				Year Ended
		December 31,				December 31,				December 31,
		2007				2006				2005
Domestic		$	(3,389	)		$	(15,035	)		$	(1,211	)
Foreign			2,804				1,659				1,465
Total		$	(585	)		$	(13,376	)		$	254

     Current and deferred income tax expense (benefit) is summarized as follows (in thousands):

		Year Ended				Year Ended				Year Ended
		December 31,				December 31,				December 31,
		2007				2006				2005
Current
Domestic		$	57			$	105			$	151
State			(70	)			419				80
Foreign			728				778				778
Total current			715				1,302				1,009
Deferred
Domestic			—				—				—
State			21				(59	)			—
Foreign			63				(89	)			(8	)
Total deferred			84				(148	)			(8	)
Total		$	799			$	1,154			$	1,001

     The components of the deferred tax asset (liability) are as follows (in thousands):

		December 31,				December 31,
		2007				2006
Deferred tax assets:
Allowance for doubtful accounts		$	551			$	826
Inventory reserve			747				1,143
Property and equipment			1,773				1,800
Net operating loss carryforwards			21,220				19,704